With U.S. auto industry at its peak, suppliers should prepare for sales plateau, Wall says

While some industry professionals have raised concerns over subprime lending, rising inventories, incentives and other trends pointing to a downturn in the automotive cycle, the industry should remain healthy in the coming years. That’s according to Mike Wall, director of automotive analysis at IHS Automotive in Grand Rapids, who forecasts North American light vehicle production to close at 17.8 million units this year. While 2017 production is projected to slide to 17.6 million units, he expects it will inch up to 18 million units in 2018 and peak at 18.7 million units in 2020 as new facilities in Mexico come online. Wall spoke with MiBiz about what automotive suppliers in West Michigan should expect in the new year.

The big question is the North American cycle. There have been some concerns over subprime debt, rising inventories and other points. Do you think the industry is positioned for some degree of downturn?

We are still more in the plateau camp. I think it’s indicative of a market that’s reaching its peak where there’s not nearly as much growth to be had. When that happens, you’ve got companies who are scrapping for share in some cases and trying to protect margin in other cases. All the automakers are having to key in on where their inventories are at. If they’re able to support a little higher inventory in some segments versus what they’re doing to dial back inventory levels in other areas, I think we’re going to see more of that.

How so?

We have more foreign automakers who are building more plants here, primarily through Mexico, and bringing on more production capacity. In doing so, we don’t see as much production growth on the part of the Detroit Three. GM says we’re going to pull a third shift at Lordstown and Grand River. What they’re doing is they’re protecting the inventory volume and margin more than anything. They’re not just simply throwing more incentives at the situation. There’s a little bit more of a disciplined approach on the part of particularly Ford and GM.

What does that mean for suppliers?

When you look at the traditional Detroit Three, we’re not looking for any real market growth overall over the next several years. This is a market that we’re seeing more and more import substitution, where you have the import players coming into the market and producing here. It can be a positive for suppliers if they’re capacitized the right way. Competition is going to be rampant. Everyone will be scrapping for what is a limited pool. If the tide isn’t rising everyone’s ship, then everyone is gunning after share or gunning to protect volume.

What impact to the automotive industry are you expecting from the new administration?

There’s a positive side in terms of the infrastructure and tax cuts. Then there’s the potentially negative side as it relates to trade. It’s balancing the two. From our planning scenarios, we do think there is some potential upside as it relates to infrastructure and tax cuts that may go on there.

Do you foresee the Trump Administration walking back the CAFE Standards? How should suppliers prepare for that uncertainty?

That is the big question right now. The EPA came out here recently and it looks like they may be trying to lock in that mid-period review early, maybe by the end of the year. It’s not entirely clear what those next steps would be if that gets locked in. At the end of the day, we still see there is the potential for more off-cycle credit and maybe the potential to see those targets stretch a bit, in terms of the runway.

Is there anything on the horizon that’s keeping you up at night?

There are two big themes. One is the U.S. cycle, of course. We’re watching it very closely for any signs of deterioration, things like credit availability, subprime lending, incentives and inventory activity. We see engagement of the consumer remaining pretty robust. I think it’s too soon to say that it’s deteriorating materially, but we are at that peak.

And the second?

When you look at the international landscape, a lot of eyes are on China right now in terms of will sales remain strong going into 2017. In order for that to happen, the government over there has a tax program that’s in place right now that’s very positive to vehicle sales. That ends at the end of the year. If they don’t extend it, the vehicle sales could be a little challenging in China. There are a lot of folks assuming they’ll extend it.